A December to Remember for Automakers

"A good product sells itself."

Sounds logical, doesn't it? Except that it doesn't always work that way. Especially in the auto world, the way things work in reality often can be expressed more accurately like this: "A product perceived to be good sells itself." A merely factually good product, however, has to prove itself before it will sell.

Unfortunately for American automakers, proving good quality takes time -- especially when the good quality comes after a company has spent years seemingly trying to prove to the world that all it can produce is junk. That's the trouble that's been afflicting Detroit's Big Three, as evidenced in yesterday's reports on automotive sales growth and market share among the Big Threes of, respectively, Detroit and Japan.

Consider the numbers:

At first glance, things don't look too bad for Ford and GM. The companies retained their respective U.S. market positions of No. 1 and No. 2. When you consider that many analysts had been predicting that Toyota would overtake Ford as the No. 2 U.S. automaker last month, that has to be counted as a victory for the Dearborn, Mich., underdog. But closer review shows that both GM and Ford lost market share last month. Moreover, with Ford publicly targeting no more than a 14% to 15% market share going forward, as it cuts production and reduces its reliance on lower-margin fleet sales, things appear destined to get worse before they get better.

Quality is job one
With that outcome pretty much a foregone conclusion, though, what investors really want to know is: Will things really get better in the end? For Ford, at least, I say "yes." And for GM, I say "maybe."

Step back from the above figures for a moment, and take a look at what's going on in the big picture in Michigan. In J.D. Power's 2006 Initial Quality Study, Ford's three main vehicle brands continued to hold their own in the rankings, with Lincoln remaining above the industry average level of "problems per 100 vehicles," Mercury remaining just two spots below the average, and Ford moving up five steps to just barely below average. GM's performance was even better. Its GMC models remained above average, and its best-known brand, Chevrolet, moved from five slots below average to one spot above.

J.D. Power's initial quality reports, however, give us just half of the picture. Car buyers don't just want to buy cars that run well today; they want to be certain the vehicles will continue to run well tomorrow. Whether they intend to drive the car into the ground or trade it in at some point, dependability is key to, respectively, the lifespan of the vehicle and its ability to retain trade-in value. From that perspective, J.D. Power's 2005 and 2006 vehicle-dependability studies also play a part in influencing an automaker's sales.

These studies bode ill for GM and help to explain why its market share continued to erode in yesterday's reports. From 2005 to 2006, GM's reputation for building quality automobiles worsened as its Chevy badge joined GMC below the industry average for reliability. Ford, in contrast, saw each of its three main brands remain above average. Viewed in combination with the company's achievements in initial quality, Ford appears well on its way to regaining a reputation for building quality machines that consumers will, in time, feel more inclined to buy.

The competition
Don't expect the change to be quick in coming, however. (Ask Hyundai about this.) The same reports that show Ford climbing in the rankings also suggest that the shine is beginning to wear off Toyota's perpetually high ratings, with its luxury Lexus brand actually ceding the top spot in the initial quality ratings to Porsche last year. Yet the table above shows that Toyota continues to reap the benefits of its long history of producing quality goods. Meanwhile, Nissan and Honda, both of which gained ground on Toyota last year, experienced only meager gains in sales as their reward.

Moral of the story
It takes time for people's perceptions to change. Ford, Honda, and Nissan are all improving their quality and narrowing Toyota's lead in this regard -- factually. Meanwhile, Toyota alone enjoys strong sales growth, fueled by the reputation for quality it has developed and nurtured over the years. If they keep doing what they're doing, the also-rans will ultimately close the gap with Toyota, but it won't come soon.

Now it's your turn to chime in. Continue this discussion on the Fool's own Buying and Maintaining a Car board, and don't forget to tell us what you think about the individual companies at Motley Fool CAPS.

Time's running out on the 2006 Foolanthropy charity drive. Five charities are competing for donations, with the one raising the most money by Jan. 7 earning an additional $10,000 from the Fool. Please consider giving to these worthy causes, and thanks for your support.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that.